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FINANCIAL CRISIS

Key week lies ahead for Spain within euro zone

German finance minister rules out need for a full bailout

Spain faces a critical week in warding off the political anathema of having to follow Greece, Ireland and Portugal in asking for a full bailout from Europe.

The pressure on Spain’s sovereign debt in the markets eased at the end of last week after European Central Bank President Mario Draghi’s rallying call for the euro, but borrowing costs remain at unsustainable levels. Saving the euro and pulling the global economy away from the brink will be the key issue in Draghi’s meeting on Monday with US Treasury Secretary Timothy Geithner, who will also meet with German Finance Secretary Wolfgang Schäuble.

Schäuble has been an unexpected validator of Spain’s efforts to right its financial situation. In an interview published Sunday in Welt am Sonntag, the German finance minister said he believed Spain did not need any more money than the 100 billion euros approved by the European Commission to recapitalize its banks and rejected the idea the EC plans to restart its bond-purchasing program to ease the pressure on Spain. “There is nothing true in this,” Schäuble said. “Spain’s funding needs in the short term are not so great and the aid package of 100 billion is sufficient.”

The German minister also wrested importance from the fact that the yield on the benchmark 10-year government bond was trading well above 7 percent last week. “This is something very painful and creates a great deal of anxiety but the world doesn’t cave in because in a few debt auctions you have to pay a few percentage points more.”

Schäuble also rejected reports that Spain may ask the European rescue funds to directly buy Spanish debt in the secondary market. “Spain needs time for its reform program to have an impact,” the minister said. “The Spanish government isn’t desperate; on the contrary it has taken all the necessary decisions, and it is putting them in practice, which merits respect.”

Other important dates this week include Italian Prime Minister Mario Monti’s meeting with Schäuble on Tuesday, while Monti is due to visit Spanish Prime Minister Mariano Rajoy in Madrid on Thursday, the same day the ECB’s monetary policy committee is due to decide whether another cut in already historically low interest rates is merited.